Markets WRAP: Rand closes at R14.20/$ averaging between R14.14 and R14.28

OVERVIEW: The rand closed at R14.20 to the greenback on Tuesday afternoon, averaging between R14.14 and R14.28.

Meanwhile U.S. stocks climbed, with the biggest tech companies among the best performers, in relatively light volume as the U.S. midterm elections got underway. The Nasdaq was the best performing major U.S. gauge, with Apple, Amazon and Microsoft leading the way. The Stoxx Europe 600 Index slid a second day.

Oil traded near the lowest level in seven months as concerns over a supply crunch eased. Investors watched for developments on trade as China’s vice president said Beijing remained ready to discuss a deal with Washington. Government bonds in Europe and the U.S. were mixed, but mostly little changed.

The euro recovered from disappointing manufacturing data to gain, while the pound strengthened despite no apparent progress on Brexit negotiations. The dollar fell for a second day. Caution prevailed in markets Tuesday, with few standout moves as investors braced for any fallout from the vote, particularly congressional races seen as a referendum on the policies of President Donald Trump.

Democrats are expected to take control of the House of Representatives but fall short in the Senate.

Meanwhile, investors have one eye on the U.K., where Theresa May is redoubling efforts to reach a Brexit deal. “All eyes are on the U.S. midterm elections today, which have resulted in a slight risk-friendly bias to markets, but a dearth of activity,” said Kit Juckes, a London-based global fixed-income strategist at Societe Generale SA. Expectations for policy gridlock are “the corner-stone of what feels like a consensual view that growth will slow,” he wrote in a note.

Elsewhere, equities climbed in Japan, Australia, South Korea and Hong Kong, but underperformed in China.

WTI oil fluctuated between small gains and losses. - Bloomberg

The responsiveness of the pound to headlines may be well documented, but its sensitivity reached new highs Tuesday as it rallied on a mere hand gesture. Investors had been waiting for news on progress in the Brexit divorce talks with U.K. Prime Minister Theresa May gathering her Cabinet Tuesday morning.

When BBC political editor Laura Kuenssberg tweeted that the Brexit Secretary Dominic Raab had said “thumbs up” on the way out of the meeting, it was enough to send the U.K. currency to the day’s high.

“Isn’t it wonderful to be working in a market where a simple thumbs-up moves a currency by 40 pips?” said Jordan Rochester, an analyst at Nomura International. The pound, which was trading around $1.3035 before the tweet, spiked up to $1.3072 before reaching the day’s high of $1.3090. Sterling also touched 87.20 pence per euro, the strongest level since June 15. - Bloomberg

Euro-area companies entered the final stretch of 2018 the most despondent in almost four years, burdened by protectionism and sliding markets.

IHS Markit’s Purchasing Manager’s Index for manufacturing and services fell to 53.1 in October, the worst since September 2016, and a gauge of the business outlook fared even worse.

“Expectations have slumped to the bleakest since the end of 2014,” said Chris Williamson, an economist at IHS Markit. “An export-led slowdown, linked to growing trade tensions and tariffs, has been exacerbated by rising political uncertainty, growing risk aversion and tightening financial conditions.

”The data signal that the euro area’s third-quarter weakness is extending into the final three months of the year, causing a problem for European Central Bank policy makers who are trying to orchestrate a gradual exit from their stimulus. They’ll next meet to set policy on December 13.

The PMI numbers were slightly better than the initial reading had indicated, and Williamson said that suggests the bloc’s third-quarter growth of 0.2% - the feeblest in four years - might be revised upward. At the same time, “it’s clear that the economy has slowed and that the weakness has intensified into the fourth quarter.”

Among the region’s four biggest economies, private-sector activity cooled in Germany and contracted in Italy. France and Spain saw an improvement. One bright spot in Tuesday’s data was German factory orders, which unexpectedly rose for a second month in September.

Orders from within the euro zone for investment goods surged, which may signal that companies are attempting to overcome capacity constraints. The ECB has said that price pressures are building as slack in the economy is used up, backing its view that its bond-buying program can be capped at the end of December. - Bloomberg

OVERVIEW: It was a mixed picture across global stock markets on Tuesday, with investors seemingly entering a holding pattern while they await the U.S. midterm elections. European equities edged lower alongside American futures while Asian shares advanced.

The pound extended gains amid Brexit hopes and Treasury yields and the dollar were steady. The Stoxx Europe 600 Index lost traction after a positive start and banks and automakers were among the sectors to drag the gauge down. Contracts on the S&P 500 turned lower though declines were not pronounced.

The mood in Asia was more upbeat and equities climbed in Japan, Australia, South Korea and Hong Kong, but underperformed in China even as the country’s vice president said Beijing remained ready to discuss a trade solution with Washington.

European government bonds were mixed and range-bound. Politics loom large for traders as U.S. congressional elections, seen as a referendum on the policies of President Donald Trump, take place Tuesday.

Democrats are expected to take control of the House of Representatives but fall short in the Senate.

Meanwhile, investors have one eye on the U.K., where Theresa May is redoubling efforts to reach a Brexit deal. Elsewhere, WTI oil was on track for its seventh day of declines.

Markets in Singapore and Malaysia were closed for a holiday. - Bloomberg

Distell non-exec resigns

The Board of Directors of Distell announced that Mr PE Beyers will retire as Independent Non-Executive Director with effect from 30 June 2019.

Mr Beyers was appointed to the Board in 2000 and has served Distell with distinction in a number of capacities, including being a member of the investment sub-committee.

Through his wide-ranging business insights, marketing skills and his passion for the company, he has made an enduring contribution over many years and provided significant strategic direction to the evolution of Distell.

Distell's shares opened at R110.04 on Tuesday morning and were trading 0.98% stronger at R112.28 by 10:10.

Andre Botha, Senior Currency Dealer at TreasuryONE said in a morning note to clients, “The Rand suffered a bit of a post-non-farm payroll hangover yesterday morning as the US dollar edged stronger against the Euro. This early momentum was quickly arrested and we have seen the US dollar lose some ground against most currencies as the market is starting to position itself for the US mid-term election.

"The Rand took this weakening in the US dollar as a shot in the arm and closed the day down at R14.15 against the US dollar. The positioning of the market yesterday shows the hand of the market, that they expect the Democrats to regain control of the House of Representatives while the Republicans hold onto the Senate.

"Should this be the case we could see renewed vigour in EM's and further Rand gains to be had. However, we have seen the market get it wrong numerous time, with the South African MTBS being a case in point. We expect the market to stay relatively docile until a clear decision could be gathered from the ballots. We expect quite a swift reaction to the election results and the market could look a lot different at the end of the week than today.

"The US dollar still is the market mover and the Rand will be influenced by any US dollar move.”

RMB's head of research Nema Ramkhelawan-Bhana weighs in on US midterms:

“A house divided against itself cannot stand.” It is remarkable that a sentiment expressed by Abraham Lincoln – who, by the way, was elected as the 16th US president on this very day more than century and a half ago – is still applicable to modern-day America.

History lesson aside, we thought the iconic quote apt, as Americans go to the polls today to elect congressional officials in a highly polarised political environment.

The results, as we said yesterday, are fairly predictable: the Democrats are expected to seize control of the House while the Republicans maintain their hold on the Senate.

If Congress is indeed split, it won’t be easy for Trump to carry out his wish-list on healthcare, immigration and the economy, as the Democrats use any and every opportunity to weigh the Republican’s actions against constitutional norms.    

That isn’t to say that all Trump's policies will be rolled back: the Democrats would lack the numbers to repeal certain measures – like the tax cuts – and reinstate key parts of the Dodd-Frank financial regulations.

Markets would look kindly on a gridlock in Washington as it would lessen the risk of radical policy and regulatory changes, which would favour risk assets – the lira and rand being the obvious beneficiaries.

Having opened at 14.15, USD/ZAR could test its September low of 14.00 if the mid-terms pan out as expected.

But investors appear to have adopted a wait-and-see approach to guard against the unknown.

A surprise Republican win in both chambers could embolden Trump to take stronger trade measures, spurring US dollar strength and amplifying asset price volatility.

This would certainly reinforce a downward trend on EUR/USD, which is teetering at 1.14. Even if the US mid-terms go to plan, the euro will come under pressure based on fundamental weakness, as the composite measures of PMI for the eurozone, due this morning, are likely reaffirm the slowdown in activity that has been prevalent throughout the region, magnifying fears of softer GDP growth.

There is no SA data scheduled for release today – and perhaps thankfully so, after yesterday’s lacklustre PMI print.

The index fell for a fourth consecutive month to 46.9 in October, from 48 in September – its lowest read since July 2014, underscoring the weakness in the economy.

Adding to the disappointment is the announcement that the petrol price will in fact increase this week despite the rand’s strength and a drop in the oil price last month, as the Central Energy Fund recoups its losses from the once-off government intervention it made in September. An overburdened consumer, paired with sluggish production growth, does not bode well for full-year GDP estimates. 

ICYMI: Standard Bank PMI

The Standard Bank whole economy Purchasing Managers’ Index (PMI) fell from 48 points in September to 46.9 in October.

This marks the lowest reading since July 2014 and comes mainly as a result of sharp declines in output, new orders and export demand, which saw firms cut back purchasing amid a recession, says NKC Economics.

The economic downturn is considered the main drive behind the shrinkage in South Africa’s private sector activity during October. The continent’s most industrialised economy dipped into recession in Q2, while the weak outlook for the rest of 2018 was underlined by a dreary midterm budget and a warning last week by S&P Global Ratings about worsening fiscal conditions.

Harmony Gold operational update for Q1, 2019

Harmony Gold Mining Company Limited issued its quarterly operational update for the first quarter ended 30 September 2018.

"Hidden Valley and Moab Khotsong have boosted the group's production and free cash flow generation compared to the September 2017 quarter. We are confident that we will achieve our annual production and cost guidance as we continue to focus on safety, production and cost management," said chief executive officer, Peter Steenkamp.

Total gold production in the September 2018 quarter increased by 30% compared to the September 2017 quarter and decreased by 2% when compared to the June 2018 quarter.

Hidden Valley mine's recovered grade and gold production is expected to improve during the remainder of the 2019 financial year (FY19) as mining into the deeper and higher grade areas of the ore-body progresses.

During the September 2017 comparative quarter, Hidden Valley recorded lower gold production due to the planned three and a half month plant stoppage and infrastructure upgrade and maintenance programme which commenced in August 2017 (and successfully completed in November 2017).

The South African operations recorded a 19% increase in gold production to 10 388kg in the September 2018 quarter when compared to the September 2017 quarter, mainly due to the addition of gold produced by Moab Khotsong (which was acquired in March 2018).

Quarter on quarter, production decreased by 2%. The underground recovered grade at Moab Khotsong is expected to improve during the remainder of FY19 as mining in the middle mine section progresses.

Operating costs during the September 2018 quarter increased due to the seasonal higher winter electricity tariffs (in July and August) and higher labour costs, including once off leave liability adjustments following the settlement of the wage agreement on 3 October 2018.

Ab InBev changes JSE Sponsor

AB InBev today announced that Questco Corporate Advisory Proprietary Limited  has been appointed as the Company’s JSE Sponsor with effect from 15 November 2018.

Deutsche Securities (SA) Proprietary Limited’s  appointment as the Company’s JSE Sponsor will terminate with effect from 30 November 2018.

Accordingly, Questco and Deutsche Securities will act as joint JSE Sponsor for the intervening period.

Bianca Botes, Corporate Treasury Manager at Peregrine Treasury Solutions:

Markets will be keeping a close eye on politics with the US elections as well as Europe, where Italy is once again at odds with the union regarding budgetary rules.

The rand is enjoying quite the breather, trading at fantastic levels for importers looking to hedge their exposure. 

A tighter range can be expected at R14.16 to R14.25 for today.

All eyes on US midterm elections

The dollar is steady but off yesterday’s highs as politics takes centre stage. The outcome of today’s mid-term elections will give an indication of US support for Trump and his policies, according to TreasuryONE.

Treasury yields also held steady at the higher levels while the Dow and S&P were up. The Nasdaq closed in the red and Asian stocks are up.

The big gainers have been emerging markets with the rand hitting 14.1500 overnight but slipping slightly to 14.2000 this morning.

Gold is hovering around the $1230.00 level and Oil at $72.80 despite the US sanctions on Iran coming into effect yesterday. 

Other market indicators from TreasuryONE:

USDZAR 14.1994

EURUSD 1.1399

EURZAR 16.1779

GBPUSD 1.3047

GBPZAR 18.5167

AUDZAR 10.2370

CADZAR 10.8214

CNYZAR 2.0500

ZARJPY 7.9795

CHFZAR 14.1077

Gold  1 229.28 

Plat 863.70 

Plad 1 129.90 

Rhod  2 415.00 

Irid  1 470.00 

Ruth  268.00 

Copp  6 206.50 

Brent  72.85 

Gold ZAR 17 445.70 

Plat ZAR 12 257.46